Serba Dinamik (Serba) announced that it has disposed its 25.2% investment (representing 128,166,250 shares) in CSE Global in the open market on the Singapore Stock Exchange, for a cash consideration of SGD57.67m or equivalent to ~RM177.33m. This development comes as a surprise as Serba was expected to have tapped on the synergies developed with the Group to put it in on even stronger footing globally while expanding its client portfolio. Nonetheless, we don’t think it is a big issue either as Serba has the wherewithal to expand on its own. Serba already has a strong presence in 25 countries across 6 regions, incidentally. That said, we see our earnings forecast reduced slightly by an average 1.8% without CSE’s contributions. We maintain our Outperform rating on Serba with TP adjusted lower to RM2.45 (from RM2.49) after the adjustment, based on unchanged PER of ~13x.

• Recap. The 25.2% stake in CSE was acquired by Serba on 13th April 2018 for RM170.6m in order to expand its geographical footprint to new markets like the USA, Mexico, Australia and New Zealand. CSE, which is listed on the Singapore Stock Exchange, generates more than 90% of its revenue outside Singapore, operating in 17 countries including the USA, Mexico, UK, UAE, Nigeria, Australia, New Zealand, India, China, South Korea, and Indonesia. It provides total integrated industrial automation, telecommunications and environmental solutions projects.

• Our view. CSE has grown its orderbook from SGD175m during the acquisition to ~SGD350m currently while reporting core net profit of SGD13.3m in FY17. Based on CSE’s audited financial statements as at 31 Dec 2019, it reported a net profit of SGD23.66m hence contributing ~RM15m to Serba. With this disposal coming just 2 years after its acquisition and the potential loss from tapping on synergies with the Group (not to mention earnings contribution), the market is perplexed more so when minimal disposal gains are being realize. Management has indicated that the disposal is timely and that its initial objectives have been met (ie. achieving relevant financial targets and international presence). We don’t think it is a big issue as Serba has the wherewithal to expand on its own. YTD wins of RM9.4bn and an outstanding orderbook at RM17.5bn bears testament to this.

• Minimal impact. Without CSE, we see our FY20-22 earnings forecast reduce slightly lower by an average 1.8%. The proceeds from the disposal will be utilised for working capital within 12 months after completion. Gain on disposal is relatively small, at around RM6.7m.

Source: PublicInvest Research - 8 Jul 2020